Inflation-Indexed Bonds - The safest investment option

This simplifies the various advantages of inflation indexed bonds and how they will be helpful to small time retail investors from inflation.

A large number of retail investors in West Bengal lost tonnes of their money in the recent Sarada chit fund scam. Chit Fund companies are becoming cheat fund companies and the biggest sufferer are the small and medium-sized investors.

In the past, lucrative risky investment proposals were made available in the market and the retail investors opted for such schemes. They ultimately burnt their fingers.

Forty years ago Sancheta Investment Company in Kolkata lured the common investors of hefty return on their investments and a large number of salaried employees in particular had suffered.

At that time many salaried employees had even withdrawn their accumulated savings from their Provident Fund Account and invested in it. Nothing could be recovered at the end of the day.

The finance ministry has appreciated the need to think of some investment proposal especially for the common investor. While introducing the Budget for the year 2013-14, our finance minister P Chidambaram mentioned in his budget speech that he wanted to introduce instruments that will protect savings of the poor and middle class from inflation.

Further the Finance Minister continued that these instruments could be inflation-indexed bonds or inflation indexed national security certificates. Acting on the desire of the finance minister to introduce such instruments, the Reserve Bank of India (RBI) brought out Inflation Indexed Bonds in the first week of June, 2013.

The basic purpose of these bonds is to protect savings of poor and middle class from inflation. It also incentivises household sector to save in financial instruments rather than buy gold. The first tranche of such bonds issued in June 2013 for Rs. 1000 crores were largely captured by large institutional investors such as pension funds, insurance and mutual funds.

In the year 1997 the RBI had issued capital indexed bonds. Those bonds provided inflation protection only for the principal amount of investment. However, these (inflation-indexed bonds) are expected to provide inflation protection not merely for the principal amount but for the interest also.

The small and medium retail investor will definitely stand to benefit by investing in these. During the current financial year the RBI is likely to issue such bonds to the tune of Rs. 15,000 crores. However, for the retail investor, new series of bonds are expected only by next quarter.

As the investments in these bonds are going to take care of the prevailing inflation in the country, the common investor can expect a good deal on his investment on these bonds.

With the going trend in rising prices of the real estate and gold, the common investor is not of the investment decisions to beat the rising inflation. So, these bonds will help the common small investor to safeguard his principal amount and receive the yield of the investment based on the prevailing inflation.

The need of these bonds was appreciated by the RBI even a decade ago. It was in 2005 the RBI came out with a discussion paper on capital indexed bonds. Currently, the focus is clear on protecting the principal and yield consequent to the prevailing inflation index from time to time.

However, the emphasis should be on making available these bonds mainly for retail participation.

The real purpose of these bonds would not be fulfilled if it is not made available for retail participation. Now, the first tranche of these was mainly captured by large institutional investors. However, the central bank has assured that the second series of these bonds will be exclusively for the retail investors.

The terms and conditions for these should be simple. After some time these bonds will be actively traded in the secondary market.

In the last four decades, gold has been used as hedge against inflation. Rightly so, the investment in gold for most investors proved that here it was a real shield to take care of the inflation. With the present volatility in the gold prices, investment in gold may not offer any capital protection for the mounting inflation.

Similar is also the situation with regard to investment in real estate. Small retail investors are not able to collect sufficient funds to make investment in real estate. Due to liquidity problems, the investment in real estate at today's prices cannot be used as hedge against inflation.

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